Nicolas Sarkozy, president of France’s ruling UMP party, on Monday grabbed centre stage in an attempt to find a compromise over the government’s controversial youth labour law as students and trades unions planned mass protests on Tuesday to demand its complete withdrawal.

Mr Sarkozy, who also serves as interior minister, was due to hold talks with UMP deputies on Monday night to discuss amendments to the First Job Contract (CPE), an employment measure designed to cut high youth unemployment that has instead provoked outrage among the young.

However, Edouard Balladur, the former prime minister and UMP deputy who remains close to Mr Sarkozy, on Monday declared the CPE to be buried. “It has disappeared. It is dead. Everyone knows it,” he said.

Mr Sarkozy, who is vying to be the right’s presidential candidate in 2007, had previously called for the CPE to be suspended.

Scenting blood, the trades unions demanded the scrapping of the CPE and also challenged the New Job Contract (CNE), another employment measure adopted by the government that allows very small companies to disregard some of the labour code’s rules when hiring new workers.

Earlier, Dominique de Villepin, the prime minister and author of the CPE, brought forward his weekly cabinet meeting to discuss the political stand-off, which has undermined his popularity. However, in an editorial, the Le Monde newspaper noted that political authority had slipped from the prime minister’s office to that of the leader of the UMP, marking an unprecedented shift of power in the history of the Fifth Republic.

The newspaper also condemned the “surrealist” situation in which President Jacques Chirac had signed the CPE into law on Friday but immediately declared it to be inoperable. “It is a calamitous end of reign,” it concluded.

Julien Dray, spokesman for the opposition Socialist party, denounced the way that Mr Sarkozy had in effect taken over the government. “From now on, we have a virtual prime minister and a real one. They have kept Dominique de Villepin in his post but stripped him of all scope for doing anything,” he said.

Eric Chaney, European economist at Morgan Stanley, the international investment bank, said investors had largely ignored this latest French “psycho-drama” because its short-term effects on the real economy had been marginal. But he said the government’s setback did not necessarily prove that the French were allergic to all reform.

Mr Chaney said: “The debate about labour market reform is now open. It is no longer an ideological debate between liberals and those who want to preserve the French social model. Everybody is talking about it.

“It is very hard to imagine that the campaign for next year’s presidential elections can skirt this issue.”